Lawyers in Jakarta expect Indonesia’s securitisation market to relaunch this year, with the country’s first major cross-border securitisation in two decades.
After several cross-border motor-cycle and auto securitisations in the 1990s, Indonesia’s securitisation market has suffered years of unfulfilled promise. The last such transaction in the country – IndoCoal Exports’ 2006 issuance of an $800 million 7% structured note– made headlines as the region’s largest-ever securitisation. But there have been no similar deals since.
O’ Melveny & Myers’ Joel Hogarth told IFLR this was set to change. With mortgage prices in Indonesia high and economic conditions relatively stable, the relaunching of a domestic securitization market made sense, he said.
“The possible issuance of cross-border mortgage or asset-backed securities is being discussed,” he said.
He predicted the market would emerge from a long period of hibernation with either a commercial real-estate deal or a Japanese-style auto-loan securitisation. He expected it would then expand to other real estate backed securities as well as other receivables.
Orrick Herrington & Sutcliffe’s Asia managing partner Michelle Taylor agreed. As Indonesians’ wealth grows, so too do the aspirations of the rich elite and middle classes, boosting the market for traditional status symbols such as cars and credit cards, and ensuring more money is spent on them, she explained.
In this environment, auto-loans are rarely in default. “Repayments on car loans are usually met, as a matter of pride,” Taylor said. “Auto-loan repayments are also often easier to meet, as they are cheaper than those for home loans.”
“The result is a stable pool of assets,” Taylor said. “And one which the public can both understand and invest in.”
White & Case’s structured finance and securitisation partner David Barwise said regardless of their historical level of default, auto and consumer loans were much more financeable assets than a long-dated mortgage pool or infrastructure asset.
“Auto loans are a hot asset class for securitisation in Asia,” he said. “That is primarily thanks to investor appetite and their ability to exit these types of investments quickly.”
Hogarth said there were currently several candidates who fit the criteria for an auto-loan securitisation.
But Barwise warned the first such transaction could take at least a year to complete and require lengthy discussion with the parties involved as well as the regulators and bank authorities.
“A domestic securitisation will effectively be a new type of transaction for Indonesia as previous deals in the country had significant offshore elements and are therefore incomparable,” he said.
“Domestic securitisations are trickier,” he said. “They require a deeper understanding of the financing, the country and its legal system, as well as awareness of any security issues and how best to exit from an investment.”
It won’t be straightforward, he said. “You are not always going to get favourable answers to your questions.”
Hogarth said tax was also an important consideration. Indonesia is a high tax jurisdiction. If the deal is not structured properly this could kill the deal from the outset.
The most promising structures are probably onshore-offshore structures. There have been a handful of small domestic mortgage securitisations in Indonesia which have demonstrated the viability of the onshore securitization vehicle - a collective investment contract (or KIK).
The challenge is to successfully integrate the onshore vehicle with an offshore issuance vehicle in a tax efficient manner, which also satisfies the rating agencies and addresses the needs of offshore investors. There may need to be embedded swaps and a detailed ranking and collateral analysis.
“I''m confident these issues can be overcome, but it''s a major investment for the first player to do this,” Hogarth said. “There are several companies that would like to do this type of deal, but most are not keen on being first to market. It could take up to a year before the first comes to market.”
Nonetheless, development of the market was both viable and logical, he said.
“Post global financial crisis, securitisation can be seen as a bit of a dirty word,” he said. “But the first layer of securitisation often makes lot of sense and introduces much needed liquidity into the market. The product only starts to get a bad reputation once you start to see second and third layer securitisations - these become incrementally more difficult to assess risk and have a less obvious beneficial effect.”
Indonesia is very promising as an emerging securitisation market as there is no first layer securitisation at present, he said. Development of a cross-border securitisation market would increase liquidity available for mortgages and auto-loans, which would consequently reduce interest rates for consumers.
Barwise said development of an Indonesian securitisation market made sense from a macro-economic perspective. “Emerging markets are where the future growth is,” he said.
“At a certain point in a country’s evolution the conventional bond and bank market no longer meets everybody’s capital-raising needs,” he said. “Indonesia has reached that point. From an offshore financier’s point of view financing receivable flows is preferable to unsecured corporate loans.”
Successful securitisations rely on confidence in the originating country’s legal system, and the financial record of the banks issuing the loans. Taylor said this could prove a problem in Indonesia where investors will have concerns about corruption and the complex regulatory regime.
Nonetheless, she said the development of Indonesian securitisation was a good sign for the regional market. For the past decade, this has been primarily focused in North Asian countries, such as Japan and Korea.
“Further expansion of the market demonstrates that consumers in the region are more stable which should in turn lead to a stronger, more stable portfolio of assets to be securitised,” she said.